More on the Social Security COLA Adjustment

Calculating the Social Security cost-of-living adjustment (COLA) with a 3-month snapshot of CPI change can generate COLAs that are unrepresentative of the actual rate of inflation for a year. For example, the 2008 COLA was 5.8%, based on the inflation in the 3rd quarter of 2008, relative to the 3rd quarter of 2007. In contrast the actual annual inflation in 2008 was 4.0% (based on the  CPI-W).The discrepancy was caused by a temporary run up in the inflation rate in the 3rd quarter due to a temporary jump in oil prices.

Notably, had the 2008 COLA been based on 4th quarter data, the COLA adjustment would have been about 1.3%, rather than 5.8%. Why the difference? Oil prices fell sharply in the 4th quarter of 2008, thereby cutting the overall inflation rate substantially.

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